I'm the Founder and Managing Partner of Ironfire Capital LLC, which runs a tech-focused hedge fund and angel fund. I did a Ph.D. in Management at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management. You can follow me on Twitter @ericjackson, subscribe to me on Facebook, follow me on Sina Weibo, or Circle me on Google+. My email is: dr.eric.jackson@me.com

Why the FTC Should Block Facebook's Acquisition Of Instagram

The FTC announced last week that it was seeking more information about Facebook‘s (FB) proposed $1 billion acquisition of photo-sharing site Instagram.

This second-round of additional information-seeking by the FTC suggests they aren’t willing to just rubber-stamp the deal.

Most people think it’s a foregone conclusion that the government will allow the deal to happen. Most commentators chuckled when they saw in Facebook’s filings that it had agreed to pay Instagram a break-up fee if the deal was blocked.

Some proponents of the deal (presumably Instagram’s or Facebook’s backers) have decried that the US government would even ask for more information about this deal. They have even raised the specter of “innovation” being stifled if this deal was blocked.

They are deeply misguided though. The FTC should block Facebook’s acquisition of Instagram. Here’s why.

The FTC’s primary job (along with the DOJ and other agencies) is to ensure suitable levels of competition in all US industries. (However, the FTC doesn’t cover all US industries, and are specifically prohibited from reviewing deals and activities of common carriers such as airlines, credit card companies, banks, and phone companies.) Most companies who are the leaders in their industries would like to acquire their nearest competitors. Doing so helps them cut costs and raise prices. It also makes it unlikely that they will ever cede their leadership position – as the only competitors will be too small, with too few resources, to effectively compete.

Facebook is the unquestionable king of social media. They have over 900 million monthly users. Even after a terrible IPO, they are still worth $75 billion today. Yet, Yahoo! had a handshake agreement to buy them for $1 billion in 2006, 2.5 years after their founding.

Instagram is barely 2 years old. It only has 13 employees. It is the king of photo-sharing applications. However, more importantly, it is the unquestionable king of pure-play mobile applications. Now Facebook wants to buy Instagram for $1 billion. What will Instagram be worth in 6 years from now, if they’re allowed to continue to grow?

As I argued 5 weeks ago, I believe there have been 3 generations of Web companies: (1) Web 1.0/Portals, (2) Social/Web 2.0, and now (3) Mobile. Facebook was/is the king of social — or I might call it desktop social. Instagram is probably the current king of mobile.

What’s remarkable to me is how the king of each of these generations seems to bump up against a litany of organization/cultural/sociological reasons why they are unable to also become a king of the subsequent generation to follow theirs. Instead, it’s a new start-up - unencumbered by the requirements of breathing life into their old model – which becomes the new king.

Instagram has a good chance of being a king of mobile. They’re a one-trick pony now with photo-sharing on a mobile device, but they’ll likely be able to expand on this strength into other interesting mobile areas.

Now Facebook wants to buy them. If I was Mark Zuckerberg and I was worth $75 billion and I had the chance to buy – and possibly shut down – the company that, in 6 years time (maybe less), will be worth far more than $75 billion and have eclipsed my company in terms of prominence and importance, why wouldn’t I want to do that? And the kicker is: I get to do that for $1 billion, of which a good chunk of that is my funny money stock. This is the best risk insurance policy I’ve ever heard of. Why wouldn’t I want to do that deal?

Of course, Zuckerberg – or any good CEO worth his capitalist salt – would. However, it’s the government’s job to prevent any anti-competitive actions. And this is why the FTC must block this deal from happening. Facebook can’t just be allowed to buy up – and shut down – any smaller company that shows some promise to one day takeover its mantle as king of social in the new mobile world.

It’s not illegal to have a monopoly – as Facebook does today in the social networking space. However, it’s illegal to acquire or maintain one through anti-competitive means. And this is at the heart of what Facebook is doing by taking Instagram off the market.

And, as for the risk of curtailing innovation argument, how does that hold any water? Will any new entrepreneur at any new start-up suddenly stop breathing, taking risks, and creating great products because Facebook isn’t allowed to acquire and shut down a rival?

The government must block this clearly anti-competitive move and let Instagram continue to compete effectively with Facebook in this brave new mobile world.

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